All health care providers, including pharmacies, hospitals and long-term care providers, should be on the lookout for potential whistleblower claims. Qui tam lawsuits — which are suits filed by whistleblowers in which the federal government may intervene, entitling the whistleblower to a share of the penalties — have been on the rise. In 2010, the Affordable Care Act amended the Anti-Kickback Statute (“AKS”), rendering AKS violations per se violations of the False Claims Act. Potential whistleblowers (called “relators” once they file a lawsuit) have taken notice, as evidenced by the significant increase in filed claims alleging violations (including some which concern alleged fraud predating 2010). A significant recent settlement of such a claim highlights the need for diligence.

Omnicare, Inc., one of the nation’s largest providers of pharmacy services to nursing homes and similar facilities, recently settled a pending qui tam action in Ohio for $120 million. A former Omnicare employee, Donald Gale, became a qui tam relator, filing suit under the False Claims Act. During his many years of employment with Omnicare, Mr. Gale had been a pharmacy consultant, director, director of operations, vice president of operations, and general manager of an Omnicare pharmacy in Ohio. Omnicare was losing money providing services to patients covered under Medicare Part A, but making money on services for patients covered under Medicare Part D. Gale alleged that Omnicare had violated the AKS by unlawfully offering a discount on services to patients covered by Medicare Part A in exchange for increased referrals of patients covered by Medicare Part D.

As background, Medicare Part A pays a per diem rate for patients who are treated in a skilled nursing facility. In general, the per diem rate is a flat fee for all of the patient’s care at the facility, including their prescription medications. As a result, a facility’s ability to profit from Medicare Part A patients is directly tied to the facility’s ability to minimize the cost of the care, including amounts spent on the patient’s prescriptions. Medicare Part D, however, typically provides coverage for prescription medications at the provider’s usual and customary price or a lower negotiated amount, if applicable, and coverage is not limited specifically to the patient’s location at a facility. In addition, patients may be covered by both Medicare Part A and Medicare Part D for different aspects of their health care needs.

Mr. Gale claimed that Omnicare accepted below-cost or discounted prices for the prescription drugs provided to patients who were covered by Medicare Part A, as remuneration for the facilities’ referrals to Omnicare for patients who were covered by Medicare Part D. Some have referred to this as a “swapping” arrangement. Omnicare denied any wrongdoing. The relator filed motions for summary judgment with varying degrees of success. The Ohio District Court’s July 2013 opinion, for example, concluded that the evidence regarding payments for the Part A and Part D-covered services did not unequivocally demonstrate kickbacks, and denied Mr. Gale’s motion for summary judgment. U.S. ex rel. Gale v. Omnicare, Inc., 2013 WL 3822152 (N.D. Ohio July 23, 2013).

Since the decision in July, the record shows that the parties continued to litigate the case. The settlement announced October 23, 2013, if accepted by the court and the Justice Department, will result in a payment of $120 million by Omnicare.

The practical takeaways from this settlement are that providers need to be vigilant in ensuring proactive compliance programs with regular audits and take any reports of noncompliance very seriously. The first step when a red flag is raised is to involve counsel, even before the internal investigation is commenced, so that the investigation can proceed under privilege.